For the past several years I’ve filed a tax extension. A tax extension allows taxpayers to file for a six-month extension if they need more time to prepare their tax returns. The neat thing is that you can obtain an extension for any reason, so long as you submit Form 4868 electronically or on paper by the April filing deadline.
By filing a tax extension, you’ll also avoid failure-to-file penalties, which can add up to 25% of the tax due. That said, you must still pay your estimated taxes if you owe anything by the April deadline, despite getting an extension.
So why the heck would anybody file an extension? Here are the main reasons.
Main Reasons To File An Extension
1) Your K-1s are late. Late K-1s are by far the main reason why taxpayers need to file an extension. A K-1 is a document given to partners in a business, S-Corporations, or trust and estate beneficiaries. Most of people who get K-1s are investors in private businesses. For businesses that operate as partnerships, it’s the partners who are responsible for paying taxes on the business’ income, not the business.
I’ve got to file an extension this year because the K-1s for my private gin investment and one venture debt fund are late. I’m pleased to have received my real estate crowdfunding K-1s on time. What I’m also thankful for is that I received only one K-1 for my RealtyShares equity fund, which has 17 investments. Although I was guided that I would only receive one K-1 for the fund, instead of one K-1 for each investment in the fund, I wasn’t sure until I finally got the document. Hooray!
All it takes is one partnership to delay sending in a K-1 for you to need to file an extension.
2) Your 1099 forms are late or inaccurate. If you do any freelance type of work, you might never receive a 1099-MISC due to negligence. Or more commonly, the document was sent, but sent to a different address. Once you realize the document was sent to the wrong address, it may take time for the company to get back to you and resend your 1099-MISC.
Sometimes, a company you worked for may go out of business, as was the case with one startup I consulted for several years ago. Sometimes, the data may be inaccurate. For example, the company might have double counted or overlooked some of your invoices. Or you might have asked the company to switch from paying you money as a sole proprietor to paying your S-corp if you incorporate halfway through the year, and as a result they might not issue you a 1099-MISC because 1099-MISC are not necessary if you are doing business with another corporation.
Related: How To Be A Rockstar Freelancer And Make More Than You Would At A Day Job
3) You’re out of town for an extended period of time. Doing your taxes takes a lot of paperwork. Thankfully, most documents can be downloaded online. But some documents are not available online and must be snail mailed to an address. If you so happen to be traveling for several months at a time, then you need an extension.
I personally print out all my documents so I can look at them on my desk and input the numbers in my tax preparation software. To have to toggle between pages on my 13″ monitor would be a royal pain.
4) You might be superstitious about an audit. Some tax professionals theorize that filing an extension will decrease your odds of being audited, since IRS auditors must meet quotas in the first half of the year. Of course nobody knows whether this is true or not, but the earlier a return is filed, the longer it is in the system and thus subject to a review.
On the flip side, filing an extension might expose you to a greater risk of audit because there are less tax filings for the IRS to review. If you do your taxes to the best of your ability, then you shouldn’t have to worry about an audit.
5) A major life event occurs around the deadline. Sometimes there are things that are much more important than filing your taxes by the April deadline. You might have lost a loved one or you might have gained a loved one through an emergency c-section that requires you and your partner to be in the hospital for a week. Other times, you might get married or go through a divorce which can complicate a tax situation. Or perhaps your business or a business you invested in goes bankrupt or gets bought for big bucks.
6) Retroactive changes to the tax law after the April deadline that may benefit you. In rare instances, tax laws may change to your benefit. Instead of having to spend extra time, stress, and expense filing an amendment, you can just file an extension, hope that a beneficial tax law gets finalized, and then you’re good to go. But in general, you can’t do much to change your past income and expenses, e.g. can’t suddenly buy a new SUV this year to deduct for last year.
Don’t File An Extension Because You Can’t Pay
Filing an extension only gives you extra time to file, but not extra time to pay. If you can’t pay what’s owed by April and end up not paying until October due to an extension, you will get hit with penalties and interest.
Here is what to do if you can’t pay all your taxes by the due date according to the IRS.
1) File on time and pay as much as you can. File on time to avoid a late filing penalty. Pay as much as you can to reduce interest charges and a late payment penalty. You can pay online, by phone, or by check or money order.
2) Get a loan or use a credit card to pay your tax. The interest and fees charged by a bank or credit card company may be less than IRS interest and penalties. This has to be the worst advice, and it goes to show how the government doesn’t care how they get their money, just so long as they do.
3) Use the Online Payment Agreement tool. You can also file Form 9465, Installment Agreement Request, with your tax return. You can even set up a direct debit agreement. With this type of payment plan, you won’t have to write a check and mail it on time each month. It also means you won’t miss payments that could lead to more penalties.
Not having a complicated tax return that needs an extension filing is one of the great benefits of simplifying your investments. My finances have gotten way too complicated over the years that I’m considering hiring a money manager + tax adviser combo. That said, I still enjoy learning all I can about taxes.
Filing an extension is a nice option, but it makes me have to revisit my taxes all over again once I get all my K-1s. That’s extra time that can be spent doing something more fun, like throwing a hot tub party at my secret hideaway in Hawaii for all readers who share my work.
Related: How To Pay Little To No Taxes For The Rest Of Your Life
The post The Main Reasons To File A Tax Extension Beyond Late K-1s appeared first on Financial Samurai.
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